Broad Market Analysis - The moment of truth for the S&P 500
As widely expected by economists, the Federal Reserve Board left interest rates unchanged yesterday, enabling the major indices to handily recover their previous day's losses. The Feds indicated that future rate hikes remain a possibility, but are not likely to happen in the near future. The news initially prompted indecision, as stocks sold off immediately after the announcement, but recovered to their prior intraday levels in the final hour. Despite relative weakness in the Semiconductor Index ($SOX), the Nasdaq Composite led the way with a 1.4% gain. The S&P 500 advanced 0.5%, while both the S&P Midcap 400 and Dow Jones Industrial Average rallied 0.6%. The small-cap Russell 2000 gained 1.2%, enabling the index to finish at its highest level since June 6 of this year. Each of the major indices finished in the upper third of their intraday ranges.
Turnover rose across the board, causing both the S&P and Nasdaq to register bullish "accumulation days." Total volume in the NYSE increased by 8%, while volume in the Nasdaq was 4% higher than the previous day's level. NYSE volume moved back above its average level, as the Nasdaq volume remained above its 50-day average for the past seven consecutive sessions. The broad-based gains on higher volume resulted from institutional buying known as "accumulation." Because institutions such as mutual funds, pensions, and hedge funds control more than half of the market's average daily volume, "up" days in the market are typically confirmed when backed by the higher volume that results from institutional participation. Market internals were positive as well. In the Nasdaq, advancing volume exceeded declining volume by a margin of more than 3 to 1, but the NYSE ratio was positive by only 3 to 2. This divergence confirmed yesterday's price divergence between the S&P and Nasdaq as well.
Not surprisingly, the S&P 500 probed above resistance of its 52-week high yesterday, but closed fractionally below it. The 52-week closing high is 1,325.76 and was set on May 5. The prior 52-week intraday high was 1,326.70 and occurred on May 8. Yesterday, the S&P 500 printed an intraday high of 1,328.53, but closed at 1,325.18. The dashed horizontal line on the chart below marks the 52-week closing high of May 5:
Because of the close proximity to its 52-week high, we mentioned in the beginning of the week that the S&P was likely to test that critical resistance level sometime this week. Obviously, that is what happened yesterday. But now the S&P faces the moment of truth -- will it be able to close and hold above the 1,326 level? If it does, the index will lack overhead supply and, as such, could continue to rally quite a bit further without a significant correction. Above the 52-week high, the 76.4% Fibonacci retracement level from the March 2000 high down to the October 2002 low is the next major area of price resistance. On the long-term monthly chart below, notice that the 76.4% Fibo retracement is at the 1,367 area. We have circled the May 2006 high in pink color:
It's good to have a general upside target if the S&P breaks out to new high territory, but it must first prove it can do so. As we have discussed on numerous occasions recently, failed breakouts to new 52-week highs often result in rapid reversals to the downside. The profitable short short sale trades in both the S&P Select Energy SPDR (XLE) and S&P Select Utilities SPDR (XLU) this month are good examples of such.
If the S&P would have closed yesterday near its intraday low of 1318, it would have already been looking like a failed breakout. However, its recovery in the final hour enabled the index to close right at its pivot. Over the next few days, we will likely see a tug-of-war between the bulls and bears. Be prepared for volatile and erratic trading while the S&P hangs out at this critical level, and be prepared with an action plan for either scenario.
If you wish to learn about Morpheus Trading Group's ETF trade entries on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the MTG archives. If you are new to our services or wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is educational and free! Click here to visit the Wagner Daily archives or here to visit the Wagner Weekly archives.
Deron Wagner, the Founder of Morpheus Trading Group and Head Trader of the Morpheus Capital hedge fund, and daily contributor to TradingMarkets.com, will be sharing his extensive knowledge on how he uses exchange traded funds for trading various market sectors. In this seminar, Wagner will be expanding on techniques discussed each day in his Wagner Daily newsletter and the ETF Trend Tracker, as well as presenting completely updated information from his video, Sector Trading Strategies, and book, The Long-Term Day Trader.
The same workshop will be conducted in various cities around the country at the following locations and dates. Specific details of each location will be e-mailed upon your registration and seat reservation:
Each workshop will run from 1:00 pm - 3:30 pm on the following dates. Click on the location of your choice to register and reserve your seat:
You will learn how to. . .
If you really want to trade ETFs, but don't know where to start, be sure to attend the workshop at a city near you. Expand your trading opportunities well beyond the commonplace ETFs such as the S&P 500 SPDR (SPY) and the Nasdaq 100 (QQQQ) and you will reap the rewards. If you missed Wagner's recent seminar at the Ft. Lauderdale International Traders Expo. (pictured above), now is your chance to catch this special workshop again at a nominal cost of only $95! Please note that seating is limited and advance registration is required. Attendance available on a first-come, first-served basis.
In this column, MTG presents you with a FREE, actual trade setup that we are stalking for entry at some point during the week. Note that, unlike the daily guidance that regular Stalk Sheet subscribers receive, this free Stalk of the Week does not take into account overall broad market conditions that can easily affect the trade over the next several days. This week's setup is:
Last week's Stalk of the Week, ATI long, triggered and remains open. Presently, the trade is near our original entry point.
Click to receive your free 1-month trial to The MTG Stalk Sheet so that you can receive an average of one to three trade ideas such as this one on a daily basis (limit one free trial per household). Subscribers are always provided with detailed entry, stop, and target prices for each trade, and intraday e-mail alerts are sent as needed.
Below is the weekly commentary that accompanied this week's updated ETF Trend Tracker that was e-mailed to subscribers. The Morpheus ETF Trend Tracker, a perfect supplement to the ETF Roundup guide, is a comprehensive table of Exchange Traded Funds (ETFs) designed for informed investors and longer-term traders who prefer to hold their ETF positions for a few weeks to several months at a time. Based exclusively on a weekly analysis of trendlines on the daily and weekly charts, the ETF Trend Tracker provides subscribers with a thorough snapshot of the primary trend direction of ETFs in every category from broad-based to industry sector to international. This information is e-mailed to subscribers weekly, in a user-friendly format that groups ETFs based on the direction of their primary trends.
Commentary:
Several sectors moved up to the "ascending trend" list last week. Among these late arrivals are the Internet (HHH), Healthcare (XLV), Dow Transportation (IYT), and Retail (RTH). The Retail sector moved especially well, closing up over 3.7% from the long entry on 9/11/06. The majority of the ETF tickers have updated Stops, so we urge you to review the latest Trend Tracker report for the updates. The last remaining Market Segment ETF on the descending trend, S&P 500 Growth (IVW), is now on the "ascending trend" list as well. The IPOs (FPX) are now bullish and has moved well in last week's action.
Moving lower to the "descending trend" are Energy (XLE), Silver (SLV), Gold (GLD), and Commodities (DBC). Oil related ETFs got crushed again last week and are in double digit returns for short positions.
Bonds are holding up as well as can be expected. There has been price appreciation for holding the ticker, but remember you will get regular monthly dividend distributions. The last distribution was Sept. 1, 2006, where we encountered an equivalent drop in ETF price to reflect the yield distributed. Corporate T-Bonds (LQD), which currently yields 5.3%, is one of the higher yielding fixed income ETFs. The benchmark mid-term bonds (IEF) is yielding 4.5%.
On the international front, Australia (EWA) weakened to the "descending trend" list. Mexico (EWW) is the worst performing ETF, so it is higher by over 5% after landing in the "descending trend" list. EWW has also triggered an early warning alert, indicating a possible reversal may be coming soon. The current risk of our Reversal Stop from the Trigger is 6.5%.
Alerts for possible triggers to the ascending trend:
BBHAlerts for possible triggers to the descending trend:
None.Click to receive your free 1-month trial to the ETF Trend Tracker (limit one free trial per household), which will be e-mailed to you every week, along with intra-week updates on an as-needed basis.